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Bond Report: Treasury yields fall a 4th day, and rates hit nearly 3 week low as Fed taper-talk drumbeat picks up

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Yields for long-dated U.S. government debt on Tuesday fell for a fourth straight session, carving out their lowest level in about three weeks, as investors read comments of tapering from Federal Reserve officials as bearish for risk assets in the short term.

How Treasurys are performing
  • The 10-year Treasury note
    TMUBMUSD10Y,
    1.557%

    was yielding 1.563%, down 4.5 basis points from Monday’s level at 3 p.m. Eastern Time.
  • The 30-year Treasury bond rate
    TMUBMUSD30Y,
    2.255%

    was at 2.259%, off 4.3 basis points.
  • The 2-year Treasury note
    TMUBMUSD02Y,
    0.145%

    was yielding 0.143%, down 0.8 basis point.

On Tuesday, the 10-year and 30-year bonds touched their lowest yields since May 6 and the 2-year note hit its lowest yield since May 7, according to Dow Jones Market Data.

What’s driving the market?

The retrenchment in long-term yields to their lowest levels since early May comes as Fed officials appeared to be preparing investors for paring back their $120 billion a month bond-buying program, amid a rise in inflation as the U.S. economy recovers from the coronavirus pandemic.

Fed No. 2 Richard Clarida told Yahoo! Finance in a Tuesday morning interview that the time to discuss scaling back the asset-purchase program may be nearing.

“I think it’s going to depend on the flow of data that we get,” the Vice Chairman said, offering the clearest comments on the Fed’s tapering plans, since minutes were released on Wednesday from the Fed’s late-April meeting.

Clarida’s comments were similar to those from San Francisco Fed President Mary Daly, who during a CNBC interview Tuesday afternoon said that the central bank was “talking about talking about tapering” its bond-buying program but cautioned that policy makers were still being data dependent and patient in their plans to normalize policy.

She said tapering was “not about doing anything now.”

“We need to be patient…data dependent…but very patient to let the volatility of the data come through,” Daly told the business network.

The San Francisco’s Fed boss’s comments come after Chicago Fed President Charles Evans also on Tuesday said that recent strong U.S. inflation readings aren’t the start of a steady move higher in consumer prices.

“It is important to emphasize that the recent increase in inflation does not appear to be the precursor of a persistent movement to undesirably high levels of inflation,” Evans said, in a speech to a virtual conference sponsored by the Bank of Japan.

On the data front, the Conference Board said its survey-based U.S. consumer-confidence index slipped to 117.2 in May from a revised 117.5 a month earlier. The original April reading was notably higher at 121.7 and had marked a pandemic high.

In other economic reports, the CoreLogic Case-Shiller U.S. home price index for March rose 13.3% annually in March. New home sales fell in April by nearly 6% as affordability constraints began to weigh on home buyers.

Short-term yields also slipped on Tuesday after a $60 billion auction of 2-year notes showed strong demand.

What fixed-income traders and strategists say

“Clarida’s comments today again inch incrementally in the hawkish direction, with the Fed vice-chair coming close to endorsing the view expressed by more hawkish officials in the April minutes that it might be appropriate to start a discussion about tapering QE in upcoming meetings (which we read as June to September) if the Fed were to see ongoing rapid progress towards its goals,” wrote Krishna Guha, vice chairman of Evercore ISI in a note.

“As the Fed moves toward the stage at which the topic of tapering is more openly discussed, the interplay between risk assets and rates will once again take center stage. The bull flattening on Tuesday contrasted with Clarida’s comment that “it may well be in the upcoming meetings, we’ll be at the point where we can begin to discuss scaling back the pace of asset purchases.” He went on to add that “it’s going to depend on the flow of data that we get.” The ability of 10-year yields to drop as low as 1.562% despite the Vice Chair’s reiteration of the ‘potential’ for taper talk is an accomplishment to be sure; moreover, it’s one which is unlikely simply a result of Clarida’s caveat that ‘it may well be’,” wrote BMO Capital Markets strategists Ian Lyngen and Ben Jeffery.

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